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Weekly Review - October 3, 2016

Weekly Review - October 3, 2016

Guest Post - Monday, October 03, 2016

Summary

In week packed with economic data, results showed weaker housing numbers for the prior month, flattish personal income/spending but somewhat stronger industrial numbers and consumer sentiment, and continued strong/low jobless claims.

Equity markets experienced small positive gains in the U.S. and were mixed overseas in a see-saw type week. Bonds gained a bit as well, with interest rates declining slightly worldwide, with U.S. corporate high yield leading the way. Oil prices jumped by several dollars upon OPEC members seeming to agree on production cuts.

Economic Notes

(0) The third and 'final' release of 2nd quarter GDP came in largely as expected, revised slightly higher to +1.4%, based on a few small tweaks in different data points (such as lower consumer and higher business spending) as opposed to a dramatic change in a single area. By this time, 2nd quarter data of any kind is old news and barely worth mentioning. However, now that 3rd quarter has wrapped up, economists have been busy calculating expectations for Q3 GDP. Hopes were high early on, but as some 'bounceback' data that was thought to be on the verge of emerging didn't emerge as much as hoped, estimates have fallen from near or even over +3% to +2.5% or so. This is certainly better than recent quarters, but nothing extraordinary.

(+) The Chicago PMI index for September rose +2.7 points to 54.2, reversing the decline of the prior month and indicating decent expansion. Production represented the largest gain, up over +7 points, while new orders and order backlogs were little changed and employment declined a bit. Interestingly, the month's 'special question' put out for anecdotal comment to respondents about the upcoming election resulted in nearly 80% noting the upcoming election is having a negligible impact on business. It's instructive to see, similarly to prior questions about Brexit and broader 'fears' of the day, companies can often be agnostic toward such short-term noise, focusing more on their immediate business prospects.

(0) Personal income in August rose +0.2%, which was in line with consensus, while personal spending was flat—expectations were for growth of a tenth of a percent. Both of these measures were a bit soft, although not a surprise, and demonstrating some slowing in the pace of consumer spending from previous periods. The Fed's preferred inflation gauge, the PCE price index, showed minor gains in August of +0.1% for headline and +0.2% for core, respectively, with lower food and energy prices keeping the former contained. This brought the year-over-year PCE inflation change to +1.0% and +1.7% for headline and core respectively—quite tempered much like other inflation measures.

(+) Durable goods orders for August came in flat on a headline basis and were up +0.6% for core, both of which outperformed expectations by about a percent. The typically-volatile aircraft orders category represented the bulk of the differential. Core shipments, however, declined -0.4%, relative to an expected gain of +0.1%.

(0) The S&P/Case Shiller home price index for July came in flat, relative to expectations of a -0.1% decline, although seasonal factors play more of a role in the summer so this has to be discounted somewhat. For the month, our home base of Portland showed another strong gain of +0.7%, while Chicago and New York fell about a half-percent. Year-over-year, the index is +5.0% higher, which is a healthy continuation of rolling 12-month increases of around 5% for the past two years.

(0/+) The advance goods trade balance for August came in just about -$0.4 bil. lower at -$58.4 bil., which was narrower than the expected -$62.2 bil. Exports rose by +0.7%, while imports gained +0.3% for the month. While food/feed/beverage exports have risen sharply in the last few months due product-specific issues, the tempering of the strong dollar trend has also likely helped with global trade.

(0) New home sales for August fell by -7.6% to 609k on a seasonally-adjusted annualized rate, slightly better than the expected decline of -8.3% to 600k. Regionally, home sales fell most dramatically in the South, but showed gains in the West. It appeared the decline might have represented some normalization downward from July's double-digit increase, which is not unusual for this more volatile series. Year-over-year, new home sales rose +9% on a non-seasonally adjusted basis, which is at the low end of the range for the past several years.

(-) Pending home sales for August fell by -2.4%, which disappointed relative to the flattish result expected, in addition to a slight revision downward for July. Regionally, the West experienced the sharpest drop, down -5%, followed by the South, while the Northeast gained just over +1%. Year-over-year, pending sales rose +4%.

(+) The final Univ. of Michigan consumer sentiment index for September showed a gain of +1.4 points to 91.2, about a point better than expected. Although both came in positive, the assessment of current conditions rose slightly more than did future expectations. Inflation expectations for the coming 5-10 years ticked up a tenth to +2.6%.

(+) The Conference Board consumer confidence index for September rose by over +3 points to 104.1—its highest level since summer 2007—above expectations calling for 99.0. The details of the report showed an improvement in consumer sentiment for both present conditions mostly, and some improvement in forward-looking expectations. The labor differential component, measuring the ease in finding work, also ticked upward by a few points. As noted by this indicator hitting a recovery high, consumer confidence remains generally robust.

(+) Initial jobless claims for the Sep. 24 ending week rose to 254k, but remained below the 260k level expected. Continuing claims for the Sep. 17 week fell a bit to 2,062k, far lower than the 2,129k expected and actually the lowest level since 2000. These continue to show labor market strength and lack of any layoff activity whatsoever.

Market Notes

Period ending 9/30/2016

1 Week (%)

YTD (%)

DJIA

0.26

7.21

 

S&P 500

0.20

7.84

Russell 2000

-0.17

11.46

MSCI-EAFE

-0.68

1.73

MSCI-EM

-1.53

13.77

BarCap U.S. Aggregate

0.06

5.80

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2015

0.16

1.06

1.76

2.27

3.01

9/23/2016

0.18

0.77

1.16

1.62

2.34

9/30/2016

0.29

0.77

1.14

1.60

2.32

U.S. stocks gained slightly in an up-and-down market week to end the quarter, with carryover from the presidential debate early in the week and later concern over the condition of Deutsche Bank. Energy stocks experienced gains of close to +5% on the week, corresponding to gains in oil prices, while utilities lost significant ground on the week.

Foreign stocks lost ground slightly, with the U.K. flattish, with economic growth coming in better than expected, but Europe and Japan losing ground. Deutsche Bank was in the news as stocks tumbled on Thursday due to news of a fine from the U.S. Dept. of Justice of $14 bil. as a penalty for its role in the U.S. housing crisis a decade ago, and subsequent worries about the firm's liquidity—and affecting the broader financial sector. However, it turned out the two parties settled on a much lower fine (in the neighborhood of $5.4 bil.) so some fears were alleviated by the end of the week. Emerging markets sold off a bit more than developed markets, led by weak results in China not helped by the choice of FTSE Russell to continue to exclude the Chinese A share markets from their index series (for the same reasons of lack of transparency, restrictive capital controls, market interventions, etc. that also kept MSCI from adding these to their indexes). Indian equities were affected somewhat by cross-border military tensions with Pakistan.

U.S. bonds were little changed as rates declined slightly on the longer end of the yield curve. High yield corporate bonds experienced a continuation of their upward momentum as of late, with the best performance of the week, while investment-grade corporate and treasury bond indexes also came in slightly positive. Foreign bonds in developed markets fared decently with lower rates, while emerging market indexes ended mixed. Interestingly, the Mexican central bank raised their base rate by +0.50% to 4.75% in order to help defend recent weakness in the peso, which is now at an all-time low, and possible future volatility due to 'possible consequences of the electoral process in the United States.' One can only imagine that the maligned peso might not fare well in the immediate aftermath of a Trump win.

Real estate lost ground in the U.S., largely as a result of the retail and lodging sectors, which tend to be more sensitive to economic spending data. Foreign REITs held their ground much better, with positive results in developed Asia.

Commodities gained a few percent, led by increases in energy and industrial metals, while precious metals and agriculture declined. Oil, the typical driver of commodity indexes, experienced gains of almost $4/barrel to just over $48. The OPEC meeting in Algiers was subject to some mixed rumors during the week, but the group appeared to agree on a production cut—the first one in 8 years. This immediately pushed up crude oil prices by +5%. Despite the somewhat-of-a-surprise announcement, such moves are often short-term and stated production cuts may not even be that applicable, due to the known incessant 'cheating' of various OPEC members (it's in their best interest to produce more to earn more needed revenue). So, we'll see how much this really matters in the longer-run.

The third quarter overall was productive for a variety of asset classes, particularly in the 'risk' sectors such as U.S. and foreign equities. Performance for fixed income was largely flattish, with rates ticking up slightly; however, positioning in government, muni and corporate bonds fared well in relative terms—high yield corporate bonds especially so. Domestic real estate cooled off, losing ground for the quarter, but was helped a bit by an allocation to foreign names which experienced gains. Commodities positions ended up nearly flat, despite indexes losing some ground during the quarter; this was mostly due to weakness in agriculture, as energy was little changed on net. Our asset allocation summary will be forwarded on in the next week or so, which describes portfolio asset class results in greater detail.

Sources: FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger's, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder's, Standard & Poor's, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. FocusPoint Solutions, Inc. is a registered investment advisor.

Notes key: (+) positive/encouraging development, (0) neutral/inconclusive/no net effect, (-) negative/discouraging development.

Additional Reading

Read the previous Weekly Review for September 26, 2016.

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